Differences Between Exotics Desks

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Are there any differences in the type of person that works and the type of work on a credit exotics vs interest rate exotics vs equity exotics trading vs fx exotics desks??

Comments (47)

 
Feb 5, 2018 - 10:55pm

Dude, you never said that when I was running an exo book :)

On a serious note, there is a fair bit of truth to it. Most exotics traders are traders in name only - most of your expertise is in structuring and execution. Usually, you get to sit one some fat flow and, if you manage properly, socialize your gains and privatize your losses.

I have a friend who lives in the country, and it's supposed to be an hour from 42nd Street. A lie! The only thing that's an hour from 42nd Street is 43rd Street!
 
Feb 4, 2018 - 4:31am

long_vega:

It is important to note, what are exotics used for?

I literally have no idea what the difference would be for each asset class.

long_vega:

Is an exotics equity trader any different than a exo rate trader? I would argue yes.

Why do you argue this?

long_vega:

Is a rates options trader different than a equity options trader, yes

I would have thought the big difference would be the liquidity

 
Feb 7, 2018 - 10:03pm

Exotics have some odd properties and often they are embedded into structured notes to meet very specific investment and hedging needs.

What makes an exotic "exotic" is that there is not an immediate hedging/replication tool in the market. So, exotics desks are paid to manage the residual correlation, volatility, etc risks

Example: A range accrual option on $3mL, coupons accrue daily if $3mL fixes between a set barrier of [0%,5%]; investor has really sold a large portfolio of daily digital options, and traders would hedge this with... Eurodollar call spreads or something similar idk... i am not a trader

 
Feb 5, 2018 - 10:58pm

Is there anything specific you want to know? I used to a run first rates, then equity exotics books, but this question is very vague.

I have a friend who lives in the country, and it's supposed to be an hour from 42nd Street. A lie! The only thing that's an hour from 42nd Street is 43rd Street!
 
Feb 5, 2018 - 11:20pm

Sorry for bombarding you with questions but...

What sorts of buy-side exits are most common for rates/equity exotics traders? Macro, quant, execution trader? Was it easier for vanilla derivs guys to move over (e.g., rates exotics vs. vanilla rates vol)?

You said you used to run exotics books, what are you up to now?

How much quant/modeling work did you do in the structuring part of the job? What sorts of techniques did you use (PCA, t-copulas, etc.)?

 
Feb 5, 2018 - 11:52pm

slippery:

What sorts of buy-side exits are most common for rates/equity exotics traders? Macro, quant, execution trader? Was it easier for vanilla derivs guys to move over (e.g., rates exotics vs. vanilla rates vol)?

Can't really speak for "common" but myself and a few other people I know ended up doing volatility arbitrage on the buy side. As an exotics guy, a lot of time, you don't really learn how to trade (see my response to M below), so beware of that. I do know one guy who is more of a macro PM but comes from the rates exotics background.

slippery:

You said you used to run exotics books, what are you up to now?

I moved over to the buy side a few years ago. I still do vol-related stuff mostly, but also dabble in stab art. Buy-side is nice, we got cookies :)

slippery:

How much quant/modeling work did you do in the structuring part of the job? What sorts of techniques did you use (PCA, t-copulas, etc.)?

Surprisingly little, mostly that's outsourced to quants - you need to understand it but not really know how to implement it. Most of the time of exotics trader is spent, (drumroll), trading exotics. As a junior on the desk you will end up (1) booking a shit ton of trades (2) booking more trades (3) executing deltas (4) pricing a whole bunch of smaller, not-so-important, exotics. At some point you will also start participating in risk managing the book, so you will get to understand what hurts and what feels nice. Some people (e.g. I used to) give people a small book so they can play with risk and learn stuff.

I have a friend who lives in the country, and it's supposed to be an hour from 42nd Street. A lie! The only thing that's an hour from 42nd Street is 43rd Street!
 
Feb 6, 2018 - 1:38am

Thanks for your detailed response. From what I've read about buy-side vol arb (and this may very well be wrong), is that you generally need a PhD to do serious alpha research/model development. Are you building models/doing QR or executing trading models built by quants? (or both?).

Side note: booking trades sounds ripe for automation

 
Feb 6, 2018 - 2:01am

While I do have a PhD (a major mistake of my youth), it is definitely not required to come up with volatility arbitrage strategies. Most real life quantitative strategies are based on simple ideas (yet they are surprisingly nuanced) so what really differentiates a good PM or an analyst is the ability to quickly navigate the search space and juggle multiple competing tasks.

At the moment, I am a one-man show and do everything, from research to execution. Which, as a matter of fact, is why I am still up watching the market in Asia instead drinking bourbon at home.

I have a friend who lives in the country, and it's supposed to be an hour from 42nd Street. A lie! The only thing that's an hour from 42nd Street is 43rd Street!
 
Best Response
Feb 6, 2018 - 5:39pm

DeltaDecay:

I don't know why but that sounds really interesting. So could you give a general idea about your day to day activities?

The God of this forum actually reached out to me regarding doing an AMA. I, personally, have doubts anyone would want to be a quant PM/trader but we shall see.

I have a friend who lives in the country, and it's supposed to be an hour from 42nd Street. A lie! The only thing that's an hour from 42nd Street is 43rd Street!
 
Feb 6, 2018 - 5:20pm

You really do ask a lot of questions :)

LaNoob:

Who are the main clients of the rates exotics vs equity exotics desks??

The below is from my experience and is for the US, European and (especially) Asian client and product mixes are very different.

For rates guys, it's mostly structured notes issuers (corporates that want to issue things like callable zeros, so they trade the hedge on swap), your own MTN desk (for structured notes issued by the bank itself), hedge funds (for random shit like spread options etc) and various ALM hedgers.

For equity exotics, your own or third-party PWM groups (for shorter-dated exo crap like accumulators etc), MTN desk (for longer-dated notes such as index or stock basket autocalls), insurance companies (if you want that business, for shit like cliquets and asian options, plus some wildly nasty long-dated shit) and hedge funds (for either barrier options or vol exotics, avoid at all costs unless you don't value you virginity).

Lastly, there is always fun legacy stuff in the book that is worth mentioning. These are "toxic product de jouir" in both worlds that you will end up having in your book and spending tons of time managing. In case of rates in Asia, for example, it's various long dated crap, usually hybridized with either FX or equity (like PRDCs). In case of equities, it's the wonderful world of W/O autocallable notes/swaps.

LaNoob:

What is the difference between in background of people who work on the desk?

In general, rates traders are much more price-sensetive and would sell their mother for 2 basis points (ask Martinghoul about it :). On a more serious note, I'd imagine there is no real difference.

LaNoob:

What is the liquidity like in each product?

What are the exit opportunities from each desk?

How much programming is done on each desk and in what languages?

LaNoob:

What is the liquidity like in each product?

Well, that's a tricky question, so I am not going into detail, but the general idea as follows. Vanilla index exotics (e.g. barriers on SPX) are as vanilla as vanilla rates exotics (e.g. CMS spread options). Anything involving single stocks is shitty, illiquid and tricky.

LaNoob:

What are the exit opportunities from each desk?

The odd thing is that as an exo trader you don't really learn much about anything but structuring and managing exotics. I know a few exo peoples that ended up in the buy side like myself, but that's an exception, not a rule.

LaNoob:

How much programming is done on each desk and in what languages?

Not much and less so as you get more senior.

I have a friend who lives in the country, and it's supposed to be an hour from 42nd Street. A lie! The only thing that's an hour from 42nd Street is 43rd Street!
 
Feb 7, 2018 - 4:16am

I used to be in an equity derivatives structuring desk and we did both vanilla and exotics (which can also be split between light exotics and more complex stuff).

Not much of a difference at all across assets in terms of personality, abilities, etc - they are all geeky, quantitatively dexterous, and good at abstraction. These days they know code too. Function within an asset class probably matters more than the asset class: the closer a function is is to the Quant team, the more true all of this is. The scale is equally applicable to Trading (who are still mostly quantitative) and to Structuring (some of whom are quants, but don't have to be, as long as they get the concepts - and these days, code). When you get to Sales, you can tell. They're more like Sales guys in other products.

There are differences in the actual nature of the work due to different clients.

Intellectually the biggest difference between asset classes is that FICC exotics are a bit more complicated than Equity exotics due to the nature of the underlying: in Rates/Credit/Commodities, there is an additional dimension in the form of tenor/maturity, which is not present in Equities (a priori the underlying shares are there forever).

The truth is you're the weak. And I'm the tyranny of evil men. But I'm tryin', Ringo. I'm tryin' real hard to be the shepherd.
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